MAcro CHAPTER 6.3:

CHAPTER SUMMARY

Just like for goods and factors of production, there is also supply and demand for currency! Demand for currency is another type of derived demand, because it comes from the demand for things that can be bought using that currency.

The demand curve for a currency looks just like every other demand curve, but the y-axis shows the exchange rate. Like anything else, when a currency gets more expensive (exchange rate rises), people demand less of it, and vice versa, causing a downward sloping demand curve. Similarly, when a currency gets more expensive, people are willing to supply more of it because they can get more of the other currency than before, so the supply of a currency is upward sloping.

These graphs show the foreign exchange demand and the foreign exchange supply. This graph represents the exchange between any two currencies (e.g. USD and VND).

"Foreign exchange" is often shortened to FOREX - you might see this term out in the world. You can probably guess that, where demand and supply meet, we find an equilibrium exchange rate and quantity of currency exchanged in a particular FOREX market. The graph below shows the FOREX market for Dollars and Euros, with its equilibrium quantity exchanged and exchange rate.

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